Robo-Advisors In Wealth Management: Are They For You?

Until recently, when it came to deciding on and executing an investment strategy, your choice was essentially: (i) hire a fancy, expensive private wealth advisor; or (ii) do it yourself. But for the past decade there’s been another option.

Robo-advisors, which emerged in 2008 and became popular around 2011, use artificial intelligence to direct wealth management decisions. They include various standalone platforms such as Betterment and Wealthfront; banks and other financial institutions, who have been using software to automate asset allocation for years, have responded with their own AI wealth advisors.

An AI costs less to employ than a human, so fees can be generally quite a bit lower, as can be the minimum assets invested. Elliott Shadforth, Asia-Pacific Wealth Management Leader for accounting and professional services giant EY, says uptake among HNWIs generally runs at about 10 to 20 per cent, but is far higher among the middle-income bracket.

Where robo-advisors excel

And there are a few things they’re likely to better at than people: keeping emotion out of investment decisions, sifting through vast quantities of data, and responding to customer requests instantaneously. You might also trust them not to direct you towards products for which they receive a commission; although, of course, machines could equally be calibrated to do just that for a particular company.

“Companies need to be consistent in the advice they give,” says Shadforth. “The use of humans creates inconsistencies; people have unknown biases. Putting all your clients on a consistent digital platform solves a lot of regulatory issues. Also, clients have historically preferred face-to-face, but now they’re showing more of a preference for digital contact,” particularly the younger generation.

Who they're suited for

At the moment robo-advisors are mainly of use to people with relatively straightforward investment requirements and relatively little investment experience; estate planning, for example, not so much. An AI’s decisions, of course, are still only ever as good as the information the client provides it with. And they might struggle with the human dimension when investments don’t go according to plan.

Photo: Andysowards.com

Experts weigh in

Christopher Blum, head of investments, Asia, JP Morgan, says: “All this stuff is fine until something goes wrong and people lose a significant amount of money. When that happens, I think pure robo-advisory doesn’t work. When things go wrong, people need someone to hold their hand, be a sounding board, empathise with them and keep them on track. Until an AI robo-advisor can empathise, I think we’ll see more of a hybrid approach.”

Adds Fan Cheuk Wan, head of investment strategy and advisory, Asia for HSBC Private Banking: “We’re not talking about a total shift to a robot-based model. The digital capability to conduct portfolio analysis and assess clients’ needs will enhance the proposition. But we still need to understand people’s investment objectives and risk parameters. It will require the development of effective platforms to communicate with clients.”

Although new, digital-only players could be seen as a threat to banks, EY’s Shadforth thinks they’ll be able to fight them off. “The real challenge for robo-advisors who’ve started recently is the cost of acquiring customers,” he says. “Some are growing their clients based and their assets under management, but not their profitability. But incumbents really need to evaluate the impact of digital advice on their operating model; they won’t survive if they don’t change.”